there are ways to measure the efficiency and effectiveness of inventory. These analyses are called, “Inventory Turnover.” Inventory turnover is calculated by COGS/Average Inventory. Meaning if you have a beginning and ending inventory you must add both of these and divide them by 2. Also to understand this better, we can calculate the number of days in inventory sales by: COGS/365 days which will give you average daily COGS…then take this amount and put into this formula: Ending Inventory/average daily COGS…
Let do an exercise:
Refer to the following data:
Company A Company B
COGS 460,000 275,000
Beginning Inventory 28,000 15,500
Ending Inventory 39,500 20,000
Class…for both companies…what is your average inventory? What is your inventory turnover? What is your number of days in inventory? What does this indicate?